The Financial Express

Financing environmental and safety concerns of RMG sector

| Updated: January 24, 2021 22:20:42

Evaly and Fianancial Express Mobile Evaly and Fianancial Express Desktop
Financing environmental and safety concerns of RMG sector

Readymade Garments (RMG) is the most important export-oriented business sector in Bangladesh, which has changed and improved remarkably since the Rana Plaza collapse in terms of achieving workplace safety and environmental compliance. Bangladesh government and donor agencies have assigned particular focus on the safety issues following the collapse of the factory; and international buyers are also increasingly requiring their suppliers to be compliant with safety and environmental standards. Progress in this area is required to maintain and increase the demand for Bangladeshi RMG, as many international buyers now tag safety and environmental standards as a pre-requisite for buying from the country. To be in the business, the concerns regarding the remedial works and involvement of additional costs are obvious. Regarding environmental concerns, setting up a green factory costs more than that for a regular one.  However, in the long run, the payback of a green factory might be much greater. To meet these expenses, financing needs of the RMG factories of the country are well recognised. Accessing remediation and green financing has been challenging for Bangladesh's RMG factories, and there is gap of funds available for green and remediation financing. Efforts are on for improving safety and environmental standards of the RMG of Bangladesh, and the associated financing.  Policymakers and donors are very keen to address the issue.

Several challenges have been associated with demand side, supply side, and other key stakeholders of safety retrofit and environmental financing. On the supply side, accessible financing for safety retrofits and environmental upgrades is a bottleneck. Information asymmetries exist in the financial sector, as many of the RMG factories are family owned (that mainly are small in size) and do not follow standard accounting and auditing rules. Credit risk assessments therefore largely hinge on relationship banking techniques, and assessment of cash flow, as well as on collateral. Provisions of credit are further made difficult by heavy documentation requirements for donor lines of credits, as well as limited capacity of banks to verify costs and appraise safety retrofits and environmental upgrades. Motivation and incentive challenges are crucial for both the financing institutions and for the investors. Especially, smaller RMG firms are facing challenges of access to finance. Banks and financial institutions need to address certain things to improve their contribution to ensure access to safety and environmental financing. Practically, a win-win situation for banks/financial institutions and RMG investors has to be created for founding a sound financing framework on safety and environmental areas for the RMG sector of Bangladesh. 

Green or environmentally sustainable financing received significant impetus in the country following the issuance of two key circulars in the year 2011 by the Bangladesh Bank: 'Policy Guidelines for Green Banking' and 'Guideline on Environmental Risk Management (ERM)'.  In 2017, BB redesigned ERM and renamed Environment and Social Risk Management Guideline (ESRM) which covered both social and environmental risk issues in bank's investment. A portion of these green financing is going to the RMG sector since the initial stage of the proliferation of the sector. Especially, financing to establish a notable number of green RMG factories is really remarkable. As of end of 2019, the country had over 100 green factories and establishments, of which more than 90 per cent were in RMG and textile sector; and of the top 10, six green RMG factories were in the country. Safety related concerns and financing received impetus mainly since 2013. Bangladesh Bank's refinancing funds have been contributing to environmental and safety related financing to the RMG sector.  In recent times, Bangladesh, with support from France's Agence Francaise de Developpement (AFD), created a 50-million Euro loan fund with Bangladesh Bank to support safety remediation and environmental and social up-gradation of RMG factories. A technical cooperation and support programme has also been introduced with the title 'Support Safety Retrofits and Environmental Upgrades in the Bangladeshi RMG Sector Project (SREUP)'. Certain RMG financing challenges are particularly targeted under the project. On the demand side, the owners and managers of RMG factories hardly see and understand the business case for these investments. There are information and knowledge gap on available remediation measures and environmental production techniques, and their costs and benefits. A critical aspect of financing is the limited knowledge and application of the existing and emerging legal framework in the area of labour, building, fire, electricity as well as environment in the RMG sector. While with donor support, substantial progress has been made to create a legal and regulatory framework, there are lot of scopes for capacity enhancements in several areas. Practically, a few finance providers understand the benefits of safety and environmental upgrades or have a market overview of available measures and products. It is crucial to integrate appropriate mechanisms to conduct cost/benefit analysis of retrofit investments and to carry out investment plans for the retrofits.

Banks and financial institutions need greater efforts for safety and environment related regulatory compliance. The compliance of the conditionality and requirements of ESRM and other safety-related circulars should not be limited to filling up checklists or obtaining letters from the potential borrowers on the compliance requirements. Rather comprehensive enforcement of the rules on environmental risk management and safety concerns in the loan processing has bcecome essential.  However, relatively smaller RMG should be given special treatment in the areas of loan processing, documentary and collateral requirements, and repayment arrangement to ensure their easy access to finance.

Environmental and safety concerns and the necessity of related financing received renewed focus in the context of the Covid-19 crisis. Access to green and safety retrofit financing and recognising green and safety-related actions by the RMG factories, financing institutions and banks would help scale up the move to a safe and green RMG industry in Bangladesh. This should be a multi-stakeholder approach and the country has no option but to enhance the efforts to push for safety and environmental up-gradation for ensuring better image and sustainability. It is time that all stakeholders should come up to ensure access to finance by the RMG for safety and environmental up-gradation. And, banks and financial institutions of the country should go for investing in a bigger way to create proper platform of safety and environmental financing framework by introducing customised and flexible products; installing supportive application, loan processing, and risk management process; and developing awareness.  Improved capacity of the bank executives and motivation and awareness of the key stakeholders is particularly important.  SREUP is expected to bring positive changes in this connection.

Dr Shah Md Ahsan Habib is Professor, Bangladesh Institute of Bank Management.

[email protected]


Share if you like